Accounting group seeks to simplify the U.S. tax code

The New York State Society of Certified Public Accountants is pushing for a flat tax, arguing a flat tax would be easier to understand and apply after years of layers of new provisions.

The NYSSCPA’s proposal, known as the Simplified Exact Transparent tax or SET, opens the door to simpler rules the society says would benefit taxpayers and accountants, creating a less subjective system where you can better anticipate tax liabilities.

“I favor the SET tax since it would simplify reporting for a great majority of Americans,” said John J. Kearney, a partner at Jaeckle, Kearney & Lepselter in Garden City. “The tax is transparent and allows the government to set the rate and the level of exclusions (deductions) based on the revenue needs of our society.”

David Lifson, a partner at Manhattan-based Hays & Co. who helped craft the proposal, said “it simplifies 94 years of patches to the Internal Revenue Code” and brings together “the simplicity of a single-rate system and the flexibility necessary to make it work.”

But not everybody thinks simplicity itself is the highest goal. Equity, some argue, matters most. And that may mean a code flexible enough to include various means of reducing taxable income.

“We need a tax code that reflects the complexity of our financial markets and business dealings,” Timothy Mulcahy, a partner at Holtz Rubenstein Reminick in Melville, said. “The world will get more complex and move faster. We need a system that reflects the world we live in.”

While a tax code revamp might seem ambitious and SET may never see the light of legislation, the seemingly immutable tax code may be due for a makeover.

“Every generation or so, the code goes through an overhaul,” according to a report the state society issued about its proposal. “A redesign of today’s cluttered, unsettling rules should produce simplicity and transparency.”

The IRS code was revamped in 1939, 1954 and 1986 resulting in the current rules known as the Internal Revenue Code of 1986. There hasn’t been a major overhaul to the tax code since then.

The 1986 code dropped the top tax bracket from 50 percent to 28 percent, while eliminating tax shelters. Top rates rose to 39.6 percent before settling at 35 percent. But the 1986 code also introduced distinctions regarding active versus passive participation and significant participation.

“All those things helped eliminate tax shelters and caused people who are wealthy to have to pay tax rather than shelter their income,” Mulcahy said. “But it added complexity.”

Advocates point out a tax code overhaul would eliminate problems that evolved gradually such as the alternative minimum tax’s expansion into a shadow tax.

Only 19,000 people paid the alternative tax under the rules for a precursor to the AMT in 1980. Today, 3 million people pay this tax, and this number could reach 33 million by 2010.

“There are things that need to be fixed in the tax code like the alternative minimum tax,” Mulcahy said. “They haven’t made permanent changes to things like the AMT. The reason they haven’t done it is they need the revenue that the AMT generates.”

Mulcahy argues the AMT can be eliminated without revamping the code. The state society, however, claims that a web of deductions, credits and exemptions also should be simplified. The SET would replace those with a streamlined set of “exclusions” from gross income.

“With more income disclosed and properly taxed, additional government revenue can fund more social and economic goals,” Lifson said of SET.

But even if major changes simplify things, they may lead to unforeseen consequences, as was the case with the 1986 redesign, which reduced real estate values by lengthening real estate depreciation and removing tax shelters.

“The value of buildings went down,” Mulcahy said. “It had a terrible impact on the real estate and construction industry.”

Nonprofits also could be hurt by a simplified code unless it includes strong incentives to donate.

“You could hurt charitable organizations. There would be a big political backlash against that,” Mulcahy said.

“At the end of the day, we live in a complicated world. And our tax code, although not perfect, somewhat reflects that.”